Market Activity


Bank of England’s Bailey “comfortable” with rate cut bets

Market Activity

Bank of England’s Bailey “comfortable” with rate cut bets

Dive into our weekly digest for expert commentary on market movements and upcoming events shaping the investment landscape

February 25, 2024

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In the UK, the composite PMI output index rose to 53.3 in February from 52.9 in January, accompanied by a solid improvement in customer demand.

Bank of England Governor Andrew Bailey told a parliamentary committee that he was “comfortable” with investors betting on rate cuts this year, although he also asserted that the economy was “showing distinct signs of an upturn” after no growth at the end of last year.

He added: "We do not endorse the market curve. We are not making a prediction of when or by how much [we will cut rates]. But...it's not unreasonable for the market to think that.”

At TPP we’ve pointed out on many occasions that inflation will start dropping extremely quickly from February onwards. As you can see from the chart below, February, March, April and May of 2023 were all high inflationary numbers accounting for 3.8%of the UK’s 4% year-over-year Consumer Price Index.

Month over month CPI UK

On March 20th, the 1.1% increase will no longer be counted in the annual figure, and it will be replaced by a number close to 0%. The UK’s 4% inflation could even dip below 3% for the first time since the summer of 2021.

After that, we lose a 0.8% followed by a 1.2%. If inflation doesn’t start to increase around that time, it will come in below the BoE’s 2% target. The question is, will they cut before it happens and pre-empt the results, or will they wait?

Empirical evidence will suggest that they’ll wait, as moving too soon would be political suicide. It’s not the right call, but it might be the safest call. One this is for sure though, the cuts need to come before the summer.


In Europe

The pan-European STOXX Europe 600 Index climbed to a record level this week, ending 1.15% higher. The benchmark rose as stellar quarterly results from NVIDIA stoked a global rally.

France’s CAC 40 Index gained 2.56%, Italy’s FTSE MIB added 3.05%, and Germany’s DAX advanced 1.76%. The UK’s FTSE 100 Index was little changed, reflecting weakness in mining and energy stocks.

European government bond yields broadly rose as investors trimmed bets on the number of interest rate cuts this year after stronger-than-expected purchasing managers’ surveys.

Early PMI data for February suggested that the eurozone economy could be stabilising, helped by a recovery in the services sector. A provisional estimate of the HCOB eurozone composite PMI for output rose to 48.9 from 47.9 in January, which might be an eight-month high, but still in contracting (PMI readings below 50 indicate that business activity shrank).

The composite PMI for Germany’s economic output declined for the eighth month in a row. Output likewise weakened in France.

Separately, final data confirmed Germany’s economy contracted 0.3% in the fourth quarter. Government consumption fell sharply due to budget constraints, and gross fixed capital formation shrank as companies cut investment. Meanwhile, the German government sharply reduced its forecast for economic growth this year to 0.2% from 1.3%, citing weaker global demand, geopolitical uncertainty, and higher inflation.

Rallying in Europe on the back of Nvidia earnings doesn’t make much sense, but then the market often doesn’t.


In the US

Equity indexes generally moved higher during a week shortened by the Presidents’ Day holiday on Monday, although the small-cap Russell 2000 Index lost ground. The S&P 500 Index hit new intraday highs, as did the Nasdaq Composite Index, which posted its biggest daily gain in about a year on Thursday, when NVIDIA added a record $277 billion to its market capitalisation.

After Wednesday’s trading session, the chipmaker reported strong quarterly revenue and earnings that topped Wall Street estimates. The company also increased its full-year guidance on robust demand for its chips, which are used in artificial intelligence applications.

Meanwhile, Fed's Waller suggests policymakers shouldn't rush to cut rates. In a speech delivered on Thursday, Federal Reserve Board Governor Christopher Waller opined that higher-than-expected inflation in January, along with the tight jobs market and the economy’s strength in the fourth quarter, “reinforced his view that we need to verify that the progress on inflation we saw in the last half of 2023 will continue.”

Waller believes that inflation is “likely” to return to the Fed’s 2% target. But he also cautioned that he’d like at least a few more months of data to see “whether January was a speed bump or a pothole.”

In Asia

In a shortened week, Japanese equities ended Thursday at a new all-time high, with the Nikkei 225 Index breaking the previous record set more than 30 years ago in December 1989. The broader TOPIX also finished at its highest level since February 1999, as Japan’s return to steady growth and corporate profitability both continued to underpin confidence. However, it was not all plain sailing, and it took a Thursday rally, ahead of the Emperor’s Birthday holiday, to snap a four-day losing streak.

Chinese equities rallied as recovery hopes rose following buoyant holiday spending during the prior week’s Lunar New Year holiday. The Shanghai Composite Index rose 4.85%, while the blue chip CSI 300 gained 3.71%. In Hong Kong, the benchmark Hang Seng Index advanced 2.36%.

The week ahead

Although there are still some key tech earnings reports still to come (such as CRM and SNOW next Wednesday), investor bullish sentiment has been stretched for awhile, some technical indicators suggest momentum is waning, and seasonality still favours the bears (February is the worst-performing month for technology stocks).

The counter to this view is that there is enough bullish momentum in place, driven by investor FOMO within the technology space, to push stocks higher into all-time high territory.

However, taking the above factors into consideration, from a near-term risk/reward assessment we believe some caution is warranted heading into next week particularly in the US market. It may undergo a period of consolidation by moving sideways for a certain timeframe, but the potential for a profit-taking pullback is developing.

The key event next week is easily the PCE inflation report on Thursday. We already saw headliner CPI figures come in higher than expected, so it is not impossible to see PCE data follow suit – even if it is generally the less volatile data set of the two.

If higher core PCE is to rise and then be followed by an expansive ISM manufacturing report, the US dollar is likely to catch a bid as bets of a cuts this year are all but eradicated. Also note that new orders, prices paid and employment sub-indices expanded last month, all of which points towards the inflationary forces doves do not want to see.

Here are the data numbers to look out for this week:

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